From now into 2005, expect steadily improving demand lead by warehouses and distribution centers.

After much waiting, the pace of materials handling equipment buying is picking up, and quite nicely at that. By year end, Modern Materials Handling expects equipment purchases to accelerate to an 8 to 10% annual growth rate. By the end of 2004, that rate is expected to move up to 12% and stay there into 2005, when there may be some tightening of equipment supply conditions.

Now that's a big change. Currently, materials handling equipment is a buyer's market. Modern's Equipment Price Index has increased at only a 1% annual rate year-to-date through August. Furthermore, lead times are below average. The industrial truck leadtime in particular was 8 weeks at summer's end, below the 9 to 10 week average reported for 2002 in Purchasing magazine's Leadtime Survey.

The expected increase in materials handling equipment sales will be due to two primary factors – low interest rates along with tax cuts and increased activity in warehouses and distribution centers.

It is common to see capital spending increase sharply right after the beginning of the expansion phase of the business cycle. However, capital expenditures have taken a couple of stutter steps since the end of the recession in November 2001.

Spending was sluggish for the first year because of the massive retrenchments needed in technology industries as overall manufacturing continued weak. Then it went on hold for eight months during the cautious investment period before the Iraqi war. It restarted in May thanks to record cheap credit and a new round of tax cuts that will drive increases into the future.

Traditionally, materials handling equipment shipments have trailed gains in factory output by about a year. With manufacturing still in the doldrums, look for warehouses and distribution centers to lead the materials handling recovery.

Quite simply, the volume of goods needing to be stored and moved through those facilities has been expanding rapidly. It's due to increasing imports brought on by relatively inexpensive foreign currencies.

The "goods" portion of GDP has posted 5% growth over the last two quarters, staying ahead of the general economy as it usually does in the early stage of recovery. At the same time, Modern's measure of retail sales of goods that are palletized is getting healthier. That metric expanded 0.9% in August to 5.9% higher than a year earlier. The end result will be that growth in goods moving through warehouses and distribution centers is going to pump up demand for materials handling equipment for the foreseeable future.

With one of the two legs of materials handling sales trailing, this equipment recovery is going to be modest compared to the cyclical recovery of the early 1990's. Equipment sales then jumped 28% in the first 18 months after mid-1993 and 43% in the first 30 months. That won't be case this time, but 12% growth is looking pretty good about now.